Econ 201 - Homework 3 (due Monday, April 1") Consider the decision of a farmer, Nicholas, who produces wheat in a perfectly competitive market. a) List three characteristics of a perfectly competitive market. Does wheat appear to meet these conditions? The table below shows the fixed and variable costs that Nicholas faces to produce different quantities of wheat. If the current equilibrium price in the wheat market is $15 per bushel, how many bushels of wheat will Nicholas produce and sell? How much profit (or loss) will Nicholas make? Output per Day (bushels) Fixed Cost Variable Cost O $10 S $10 $10 $10 $18 $10 $30 $10 $45 $10 $62 $10 $80 Now, consider what would happen if there is an increase in consumer incomes that increases the market demand for wheat and pushes the equilibrium price for wheat up to $17 per bushel. In this case, how many bushels of wheat will Nicholas produce and sell? How much profit (or loss) will Nicholas make? d) When the price of wheat increased in part c, did the quantity supplied by Nicholas increase, decrease, or stay the same? Does this support or contradict the law of supply. What happened to his profit level? 2. Draw the demand, MR, ATC, AVC, and MC curves for a perfectly competitive firm who is currently operating and making a profit. Be sure to carefully label the axes and all curves. Also, label the price the firm will charge (P*) and the quantity the firm will produce (q). a) Now, shade in and label the profit for the firm on your graph In the LR, will other firms want to enter the market or exit the market? Assuming other firms do this, will the market supply curve increase, decrease, or stay the same? Will the equilibrium price increase, decrease, or stay the same? c) On your graph of the individual firm, draw the effect of any entry or exit (label any shifted curves and/or price with a ' symbol) and be sure to label the new profit-maximizing output of the firm (q'). As a result, will the firm produce more, less, or the same amount of output? Will the profit of the firm increase, decrease, or stay the same? 3. Book Question 4.5 on page 425 4. Book Question 3.3 on page 519 5. Answer the following questions about monopolies. a) Name and briefly describe two types of barriers to entry that might help create a monopoly. b) Is a monopoly efficient in the short-run? Is a monopoly efficient in the long-run? Name two factors (other than HHI) that are considered when antitrust authorities are evaluating a horizontal merger What is the highest HHI can be in a market? What is the lowest HHI can be in a market? Are antitrust authorities more concerned about a merger when HHI is high or low? 6. Book Question 3.7 on page 453 7. For each of the following statements, list which market structure(s) it applies to. You may abbreviate with PC (perfect competition), M (monopoly), and MC (monopolistic competition) a) There are lots of buyers and sellers in the market. b) The sellers in the market are price-makers. c) Firm(s) in the market set Q* where MR = MC. d) The market is efficient. e) Firms in the market always make 0 economic profit in a long-run equilibrium
